Finance Minister Nirmala Sitharaman is set to present the Union Budget 2025 on February 1, marking the second full-fledged budget of the Modi government’s third term. Taxpayers are eagerly awaiting announcements, especially regarding potential changes in taxation policies. Experts are advocating for key reforms such as the inclusion of House Rent Allowance (HRA) in the new tax regime, an increase in Section 80C tax deductions, and a standard deduction of Rs 1 lakh. The government’s focus continues to be on promoting the new tax regime.
Standard Deduction
The new tax regime, introduced in the Union Budget 2020, was designed as a simplified alternative to the existing system. It offers lower tax rates but removes various deductions and exemptions available under the old system, such as the standard deduction and HRA.
New Tax Regime vs Old Tax Regime
Both tax regimes provide a standard deduction for salaried employees. Under the old tax regime, all salaried individuals, regardless of their income, can claim a standard deduction of Rs 50,000. This benefit also extends to pensioners. In Budget 2024, Finance Minister Sitharaman increased the standard deduction for salaried individuals to Rs 75,000 under the new tax regime.
Section 80C
Taxpayers can reduce their taxable income by investing in financial instruments or making eligible expenditures. Under Section 80C of the Income Tax Act, 1961, individuals can claim deductions of up to Rs 1.5 lakh. This section is widely used for tax-saving purposes and covers investment options such as Life Insurance Corporation (LIC) policies and Public Provident Fund (PPF) contributions.
Investments under Section 80C
Taxable Income
Individuals and Hindu Undivided Families (HUFs) are eligible for tax deductions under Section 80C, but companies, partnership firms, and Limited Liability Partnerships (LLPs) are not. The total deduction limit under Sections 80C, 80CCC, and 80CCD(1) is capped at Rs 1.5 lakh. Additionally, individuals can claim an extra deduction of Rs 50,000 under Section 80CCD(1B) to further reduce their taxable income.
Provident Funds
Investing in provident funds like the Employees’ Provident Fund (EPF) and Public Provident Fund (PPF) helps lower taxable income. Employee contributions to EPF accounts qualify for tax deductions under Section 80C, while employer contributions are tax-free but do not qualify for a deduction under this section.
Home Loan
Individuals can claim deductions on the repayment of the principal amount of a home loan under Section 80EE. This provision allows tax benefits on the interest component of home loans taken from banks or financial institutions. Borrowers can avail a deduction of up to Rs 50,000 per financial year for home loan interest payments under this section.
Public Provident Fund (PPF)
Under Section 80C of the Income Tax Act, 1961, individuals can claim deductions for contributions made to the Public Provident Fund (PPF). The maximum investment limit is Rs 1.5 lakh per financial year, offering an interest rate of 7.1%.
HRA Exemption
A major demand from taxpayers is the inclusion of HRA exemption in the new tax regime. Currently, this benefit is available only under the old system, which results in significant tax savings. The exemption amount is calculated based on the lowest of the following:
- Actual HRA received
- 50% of basic salary (40% for non-metro residents)
- Rent paid minus 10% of basic salary
Experts argue that incorporating HRA exemptions in the new tax regime would make it more practical, especially for taxpayers who bear high housing expenses.